Most DAOs are only online, and members rarely, if ever, meet in person. Blockchain technology runs a DAO, which makes all transactions clear and unchangeable.
Researchers are looking into the possibility of using the DAO structure in business and government because they can use it in many traditional organisational structures. DAOs are a possible way to solve corruption and bureaucracy because they are reliable and transparent.
This article will detail the rise of DAOs in the legal industry and the pros and cons of DAO-based structures for law firms.
Table of Contents
How Do DAOs Work?
DAOs run on a system of smart contracts and decentralised governance. Smart contracts are computer protocols that make it easier, more reliable, or legally binding to negotiate terms upon agreements. You can use them to automate many governance tasks, like voting and managing assets.
Smart contracts are written in code and stored in the blockchain. It makes them permanent, clear, and impossible to change. DAOs work well because smart contracts can automatically carry out agreements without intermediaries.
The smart contract works upon meeting certain conditions. You can also use smart contracts to automate workflows, which means DAOs don’t need a central authority or overseer to finish tasks.
Community Votes Create Rules
There is a development of DAO’s smart contracts when the community votes on the rules. DAOs are very flexible because future voting can change these rules.
Since DAOs are open and transparent, no one can change the rules without the community’s approval. It makes it harder for one person or group to change the practices to suit their needs.
DAO Tokens Can Be Purchased Or Rewarded
Voting and other government operations require DAO tokens. DAO tokens can incentivise behaviour. Members who execute DAO-beneficial actions may receive tokens. Tokens are helpful in voting or accessing special privileges.
The Rise Of DAOs In The Legal Industry
In the last few years, the legal field has seen several proposed changes on how to do things. Platforms like Luminance tried to apply artificial intelligence (AI) to legal, especially for data protection, contract reviews, due diligence, and most miniature reviews. Diligen is another platform that looks at contracts by using machine learning.
Even though these platforms have made legal workflows much better for the firms that have adopted them, they haven’t had a significant impact on the industry as a whole, at least not at the level expected if DAOs were to be used as frameworks for legal entities soon.
But the legal world doesn’t, so to speak, “go with the flow.” Many businesses still use the same old business models and corporate structures. Most lawyers still won’t use legal technology like Luminance and Diligen.
DAOs have already made their way into the legal system, but it will take a long time for them to change on a structural and administrative level. ConstitutionDAO shut down in 2021 after losing Sotheby’s bid for a copy of the United States Constitution.
The idea behind the project was that everyone should be able to own a copy of the Constitution. The plan was to buy one of the last copies and put it on public display. The project took off and raised more than $40 million worth of Ether (ETH).
After losing to a private bidder who offered $43.2 million, the group decided that they do the project. The money raised was given back to the people who gave it. ConstitutionDAO didn’t reach its goal, but it was a turning point in realising that the DAO as a framework could potentially change the way the law works.
Legal Limitations Preventing DAOs From Gaining Full Mainstream Adoption
The MIT Computational Law Report’s research shows that the law does not currently apply to the AI-powered algorithm that runs DAOs, which are autonomous legal entities. The biggest worries are AI’s legal status and ability to cause harm.
Regarding DAOs, liability is a significant worry. How would the law hold DAOs accountable in certain situations, especially when a crime is involved? There are also a lot of other problems, which we will look at in more detail below.
1. Unlimited Liability
The regulation of DAOs is likewise inconsistent. Due to their inability to incorporate, many end up as partnerships, which expose their members to limitless personal responsibility.
In the absence of formal recognition by the law, DAOs cannot enjoy the benefits of limited liability status. Those who fund a DAO may be personally responsible for its debts and liabilities.
It is a serious problem since it would make many people reluctant to fund a DAO. DAOs have a hard time attracting investors since most people are hesitant to put their money at risk because of the absence of restricted liability.
2. Regulatory Uncertainties
DAOs also suffer regulatory uncertainty. Most present rules don’t have a synergy with DAOs, so it’s unclear how they’d apply. It risks regulatory action that might hinder innovation.
Traditional firms must follow AML and KYC policies. These prevent money laundering and fraud in corporations. These safeguard DAO members, token holders, and customers.
DAOs’ anonymity complicates AML–KYC compliance. Most DAOs have global members, therefore, jurisdiction is a concern.
3. Risks Of Distrubuted Governance
Distributed governance is another DAO vulnerability. Smart contracts regulate decentralised DAOs with no central authority. These rules might be hacked or modified, causing disaster.
How To Make DAOs Work In The Legal Industry
DAOs are still a workable solution for the legal field, despite the problems above and issues. As we’ve seen, there is a proposition of some solutions to help you get around the regulations that pop up when you want to establish a company that operates independently.
For example, how would a legal practice benefit from a DAO-based corporate structure? To begin, DAOs don’t always necessitate using tokens or voting rights. In conventional legal companies, for instance, “partners” both possess equity and control the company. A different management team and shareholder base are not in place.
Benefits Of A DAO-Based Structure For Law Firms
1. The organisation’s management functions can be done via smart contracts, eliminating the need for partners to juggle client work and management activities.
2. Profitability can be maintained and improved upon the execution of smart contracts once you achieve metrics like revenue, realisation and utilisation.
3. DAO can streamline law firm management and monitoring via automation.
However, even if there is an implementation of DAOs, legal orders keep their present corporate structure in the organisational hierarchy. It is because legal firms continue to operate as top-down organisations, which are better suited to traditional demands.